Governments Can Use a Common Framework When Comparing Carbon Pricing Policies

TORONTO, ON--(Marketwired - July 27, 2016) - In a report released today, Canada's Ecofiscal Commission provides a common, consistent framework for federal and provincial governments to compare provincial carbon pricing policies. The report, Comparing Stringency of Carbon Pricing Policies, explains the various ways policy stringency can be assessed, and argues that there is no single best approach.

The report identifies five different metrics that can be used to compare policy stringency, including two new ones -- the coverage-weighted carbon price and the trade-adjusted carbon price. These new metrics show that the stringency of Canada's various carbon pricing policies are much closer than when compared using their marginal carbon prices.

By incorporating the differences between policies, including what emissions are covered and international trade in emissions permits, these new metrics provide a more practical and comprehensive way to compare them. This makes the new metrics uniquely well-positioned to support coordination among the different provincial and federal policies, which will help drive the most cost-effective reductions in Canada.

For example, the report identifies the trade-adjusted carbon price, which accounts for international trade in emissions permits, as a metric that could be especially useful in efforts to coordinate provincial policies.

"Our research has shown that carbon pricing should be the touchstone of any climate policy, as it is the most cost-effective way to reduce greenhouse gas emissions. Ramping up carbon prices -- steadily over time -- will help the country achieve deeper emissions reductions at the lowest possible cost to the economy," said Commission Chair Chris Ragan, an associate professor of economics at McGill University and member of the federal government's new Advisory Council on Economic Growth.

"When comparing provincial carbon pricing policies, it is useful to use metrics that take into account the various design details, such as coverage and trade, that differ from policy to policy. That way we are comparing policies on a more level playing field."

"As the world continues to embrace carbon pricing, it will be helpful to have a coordinated pan-Canadian system that finds a way to balance the higher carbon prices needed to drive behavioural change with the lower prices that international trade can provide, which can make the policies even more cost-effective," Ragan continued. "This report shows that the way we compare our carbon pricing policies matters, and that in harmonizing prices nationally -- and beyond -- we can ensure that we minimize the cost of emissions reductions, which will ensure the best economic and environmental outcomes for all."

Report Abstract

More stringent carbon pricing policy leads to greater emissions reductions. This report seeks to provide governments with a common, consistent framework for comparing the stringency of provincial carbon pricing policies. It considers five metrics of stringency, including two new metrics that seek to account for design differences between provincial policies. These metrics can support efforts to benchmark the contributions of existing provincial carbon pricing policies. They can also support efforts to coordinate provincial policies nationally. We find that considering multiple metrics of stringency is useful, however we also conclude that a trade-adjusted­ coverage carbon price is a practical and flexible means of comparing stringency across provincial policies that could be especially useful in efforts to coordinate provincial policies.

About Canada's Ecofiscal Commission

Established in November 2014, Canada's Ecofiscal Commission is a unique effort to advance fiscal policy reform for the benefit of Canada's economy and environment. The commission comprises a dozen prominent economists from across Canada's regions and 18 advisors including former political leaders and leaders from the business sector and civil society.

Over its six-year mandate, the commission will publish and promote discussion of research and recommendations grounded in Canada's regionally diverse economic and policy context. It will focus on issues most relevant to Canadians and policy-makers including those affecting fresh water, air quality, environmental disasters, greenhouse gas emissions, transportation and road congestion.

The Commission termed these "ecofiscal" policies -- a new word to facilitate a new conversation about solutions guided by both economic and environmental objectives. The Commission is funded by several Canadian family foundations and Canadian corporations.

For more information about the Commission and to view its reports visit: www.ecofiscal.ca.